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First half still positive

Surveys show 2Q office market down or modestly up

Office leasing in San Diego County in the second quarter ranged from modestly positive to negative -- athough the first half of 2014 remained strong across the county and in some major markets.

The differences in reports may involve the sample's exact timing, the minimum size of the surveyed buildings and whether leased but vacant space is considered occupied.

JLL (Jones Lang LaSalle; NYSE: JLL) pegged the countywide net absorption at a modest 73,829 square feet for the quarter and 84,000 square feet for the year's first half.

CBRE (NYSE: CBG) reported negative net absorption of 104,352 during the second quarter, but 493,798 square feet of net absorption through 2014's first half.

CBRE said the negative net absorption in this latest quarter was largely attributable to the closure of the 129,000-square-foot Chase Mortgage processing center in Rancho Bernardo, and the move of LPL Financial (Nasdaq: LPLA) out of 350,000 square feet in multiple locations into the new 400,000-square-foot La Jolla Commons II building in the University Towne Centre area.

While it is not known what Hines' La Jolla Commons III will look like, The Irvine Co. has enough confidence that it isconstructing its 307,000-square-foot One La Jolla Center project (formerly known as La Jolla Center III). The speculative development is expected to take about two years to complete.

The One La Jolla Center project is within walking distance from Orange County-based developer's 800,000-square-foot Plaza at La Jolla Village.

The UTC market posted 20,302 square feet of negative absorption in the second quarter, according to Colliers International. It still recorded 353,850 square feet of net absorption for the year's first half, placing its overall vacancy at 10 percent.

The story in neighboring Del Mar Heights is what has happened to lease rates. Rents for prime office space have not only reached levels seen immediately prior to the Great Recession, they have surpassed them in some instances.

Cassidy Turley found the average asking rent for Class A space in Del Mar Heights was $4.17 in June and $3.15 for Class B, which is still a high figure for secondary space.

The story is different for downtown San Diego: Irvine Co. planned to develop an approximately 700,000-square-foot, 34-story building at 700 West Broadway before the recession put those plans on hold.

Another major downtown San Diego office building is under construction; the 320,000-square-foot build-to-suit for Sempra Energy (NYSE: SRE) in the East Village.

When that building at 424 Eighth Ave. is completed by late 2015, the approximately 350,000 square feet that Sempra currently occupies at Sandor Shapery-owned 101 Ash St. will be vacated.

Although the economy has improved, the downtown office market still has 2 million square feet to fill, not counting the former Sempra space.

Cushman & Wakefield reported downtown has 10.97 million square feet of office space in the 90 buildings it surveys. The overall vacancy rate was 18 percent, as of the end of June.

Although downtown had 390,633 square feet of gross leasing, most of the moves were lateral.

That means there was only 54,421 square feet of net absorption through the year's first half, according to Cushman & Wakefield.

One thing that could help the dynamic is a residential conversion of the 625 Broadway Building, which has about 223,000 square feet of mostly vacant leasable space.

Cassidy Turley reported that North County's office markets are still trying to recover from overbuilding that happened prior to the recession.

CT reported that Carlsbad posted 22,802 square feet of net absorption in the second quarter and 116,242 square feet through June. The market's overall availability was 22.6 percent.

Oceanside has experienced similar problems filling its spaces: CT reported that North County submarket posted 40,616 square feet of negative absorption through June.

CT said the slight amount of negative absorption means Oceanside still means the total availability there is 28 percent.

Only neighboring Vista, which has less square footage, has a higher figure in the North County, with a 31.8 percent overall availability.

Different surveys vary, but all seem to agree that while many buildings are at or near full, the 900,000-square-foot Campus Point submarket needs substantial leasing before it can be considered "recovered."

About 450,000 square feet of this space is owned in one building by Alexandria Real Estate Equities (NYSE: ARE), which is fully leased, at 10300 Campus Point Drive.

Colliers reported while Campus Point lacks any sublease space, its vacancy still stood at 31.6 percent as of the end of June.

Campus Point is recovering from SAIC's (NYSE: SAIC) vacating of 330,000 square feet in its move to Virginia last year.

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